Credit downgrade last thing a fragile economy needs now

The Government has raised the risk of a credit downgrade by borrowing to pay for the Christchurch earthquake rather than raising a levy, the Green Party said today.

“John Key’s strategy of borrowing to pay for the rebuilding Christchurch exposes New Zealand to a higher risk of a credit downgrade,” said Green Party Co-Leader Russel Norman.

“A credit downgrade would lead to higher interest rates and that’s about the last thing our fragile economy needs right now.

“The alternative approach to funding the rebuild — raising a temporary levy on income — would reduce the risks of a credit downgrade, because it’s fiscally more responsible.

Dr Norman was responding to figures out today showing economic growth for the December quarter was particularly weak at 0.2 per cent.

“The possibility of a credit downgrade due to increased pressure on the Government’s books from borrowing is real,” said Dr Norman.

“Treasury have advised that any downgrade would add a further 30 to 100 basis points to interest rates. All those with mortgages will have to pay higher interest payments to service their debt — money that will flow to offshore lenders.

“A levy would reduce the upward risk to interest rates and directly fund the rebuilding of Christchurch.”

To date, John Key has rejected the Green Party’s levy proposal, claiming an additional small tax on higher income earners would suppress demand in the economy.

“John Key has rejected the levy proposal on weak economic grounds. A recent NZIER report has shown that those on higher incomes are saving not spending right now. A small temporary levy wouldn’t affect economic activity,” said Dr Norman.

“New Zealanders have indicated they are prepared to fund a levy as the fairest way to share the costs of the earthquake. Ignoring this option in favour of more debt is the high risk way to pay for an earthquake.”

More information on the Green Party’s levy proposal:
http://www.greens.org.nz/sites/default/files/how_an_earthquake_levy_could_look_green_party_research_1.pdf